Economics
Financial Institutions
Financial institutions are organizations that provide financial services to individuals and businesses. They include banks, credit unions, insurance companies, investment firms, and other entities that facilitate the flow of funds in the economy. These institutions play a crucial role in allocating capital, managing risk, and providing liquidity to support economic activities.
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11 Key excerpts on "Financial Institutions"
eBook - PDFIntroduction to Finance
Markets, Investments, and Financial Management
- Ronald W. Melicher, Edgar A. Norton(Authors)
- 2020(Publication Date)
- Wiley(Publisher)
financial system since the Great Depression years of the 1930s. More recently the United States has experienced ten plus years of economic growth. Of course, new economic and financial crisis probably will continue to occur in the future. Within the general field of finance, there are three areas of study – financial institu- tions and markets, investments, and financial management. Financial Institutions collect funds from savers and lend them to, or invest them in, businesses or people that need cash. Exam- ples of Financial Institutions are commercial banks, investment banks, insurance companies, and mutual funds. Financial Institutions operate as part of the financial system. The financial system is the environment of finance. It includes the laws and regulations that affect finan- cial transactions. The financial system encompasses the Federal Reserve System, which con- trols the supply of money in the U.S. economy. It also consists of the mechanisms that have been constructed to facilitate the flow of money and financial securities among countries. Financial markets represent ways for bringing those who have money to invest together with those who need funds. Financial markets, which include markets for mortgages, securities, and currencies, are necessary for a financial system to operate efficiently. Part 1 of this book examines the financial system, and the role of Financial Institutions and financial markets in it. Securities markets play an important role in helping businesses and governments raise new funds. Securities markets also facilitate the transfer of securities between investors. A securities market can be a central location for the trading of financial claims, such as the New York Stock Exchange. It may also take the form of a communications network, as with the over-the-counter market, which is another means by which stocks and bonds can be traded. INTRODUCTION Institutions and Markets
- Thomas F. Cargill(Author)
- 2017(Publication Date)
- Cambridge University Press(Publisher)
Examples of Financial Institutions are banks, S&Ls, credit unions, insurance companies, pension funds and finance companies. Financial Institutions provide not only the majority of financial needs of the econ-omy but also financial services to a larger number of smaller lenders and borrowers than cannot be accommodated in direct financial markets. Direct financial markets support the borrowing needs of large businesses and government, while indirect finance supports the borrowing needs of large and small businesses alike as well as virtually all consumer and mortgage credit needs. 57 58 Chapter 3. The Financial System and the Country’s Flow of Funds Financial markets and institutions both transfer funds but are considered sep-arately because they represent two distinctly different channels of finance, even though they have important interactions between each other. These interactions have increased dramatically since the 1970s, when deregulation and liberalization of the financial system became an ongoing process. Financial markets are, essentially, electronic meeting places for lenders and bor-rowers rather than the usual “bricks and mortar” Financial Institutions most people think of as the financial system. Financial markets have no ongoing balance sheet. Even though an agent or broker assists in bringing the lender and borrow together and charges a fee for that service, the lending and borrowing transaction does not appear on the agent’s or broker’s balance sheet. The agent or broker is merely an intermediary who takes no position in the promise to pay that is purchased by the lender and sold by the borrower. In contrast, Financial Institutions are ongoing finan-cial businesses, are frequently identified as “bricks and mortar” businesses and have an ongoing balance sheet that reflects the lending and borrowing transaction.
eBook - PDFFundamentals of Financial Instruments
An Introduction to Stocks, Bonds, Foreign Exchange, and Derivatives
- Sunil K. Parameswaran(Author)
- 2022(Publication Date)
- Wiley(Publisher)
CHAPTER 1 An Introduction to Financial Institutions, Instruments, and Markets THE ROLE OF AN ECONOMIC SYSTEM Economic systems are designed to collect savings in an economy and allocate the available resources efficiently to those who either seek funds for current consumption in excess of what their resources would permit, or else for investments in productive assets. The key role of an economic system is to ensure efficient allocation . Efficient and free flow of resources from one economic entity to another is a sine qua non for a modern economy. This is because the larger the flow of resources and the more effi-cient their allocation, the greater is the chance that the requirements of all economic agents can be satisfied, and consequently the greater are the odds that the economy’s output will be maximized. The functioning of an economic system entails making decisions about both the production of goods and services and their subsequent distribution. The success of an economy is gauged by the extent of wealth creation. A successful economy con-sequently is one that makes and implements judicious economic decisions from the standpoints of production and distribution. In an efficient economy, resources will be allocated to those economic agents who are able to derive the optimum value of output by employing the resources allocated to them. Why are we giving so much importance to the efficiency of an economic system? The emphasis on efficiency is because every economy is characterized by a relative scarcity of resources as compared to the demand for them. In principle, the demand for resources by economic agents can be virtually unlimited, but in practice, economies are characterized by a finite stock of resources. Efficient allocation requires an extraordinary amount of information as to what people need, how best goods and services can be produced to cater to these needs, and how best the produced output can be distributed.
eBook - PDF- Scott Besley, Eugene Brigham, Scott Besley(Authors)
- 2021(Publication Date)
- Cengage Learning EMEA(Publisher)
5. Related services—A system of specialized intermedi- aries offers more than just a network of mechanisms to transfer funds from savers to borrowers. Many intermediaries provide other financial services, such as check clearing services, insurance, retirement funds, and trust services. 3-4a Types of Financial Intermediaries In the United States, a large set of specialized, highly ef- ficient financial intermediaries has evolved. Although each type of intermediary originated to satisfy a particular need in the financial markets, recent competition, deregulation, and government policy have created such a rapidly chang- ing arena that different institutions currently offer financial products and perform services that previously were re- served for other Financial Institutions. This trend has caused the lines among the various types of intermediaries to be- come blurred. Still, some degree of institutional identity persists, and these distinctions are discussed in this section. Commercial Banks. Commercial banks, commonly referred to simply as banks, are the traditional “department stores of finance”—that is, they offer a wide range of products and services to a variety of customers. Originally, banks were established to serve the needs of commerce, or business—hence the name “commercial banks.” Today, commercial banks, which represent one of the largest types of financial intermediaries, still represent the primary source of short-term business loans. Histori- cally, banks were the institutions that han- dled checking accounts financial intermediaries Organizations that create various loans and investments from funds provided by depositors. 63 CHAPTER 3: The Financial Environment: Markets, Institutions, and Investment Banking Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
eBook - PDFThe Power of Collective Purse Strings
The Effect of Bank Hegemony on Corporations and the State
- Davita Silfen Glasberg(Author)
- 2023(Publication Date)
- University of California Press(Publisher)
Chapter One The Importance of Financial Institutions in the Political Economy [Banks are] . . . in a position where they can exert sig- nificant influence . . . on corporate decisions and poli- cies. . . . [L]argely unknown is the extent to which these institutions actually use the power . . . to influence cor- porate decisions. —Julius W. Allen, Library of Congress The international financial system is not separable from our domestic banking and credit system. . . . A shock to one would be a shock to the other. In that very real sense we are not considering esoteric matters of international finance. . . . We are talking about dealing with a threat to the recovery, the jobs, and the prosperity of our own country. —Paul A. Volcker, Chairman of the Federal Reserve Observers have long recognized the power of individual banks to advance or deny loans to industrial corporations (Hobson 1905; Hilferding 1 9 1 0 ; Lenin 1 9 1 7 ; Menshikov 1969; Fitch and Oppen- heimer 1970; Kotz 1978). Yet the processes and effects of banks' collective control of capital flows remain murky. What happens when an industrial corporation faces an organized financial com- munity? National and local governments throughout the world 1 1 The Power of Collective Purse Strings imitate corporations by borrowing to finance various projects. What happens when the state confronts an internationally orga- nized banking community? What is the effect on the state's relative autonomy? Do state capital flow relations look like those in the corporate community? Many observers and theorists have offered intriguing speculations about these issues, but no one has system- atically substantiated them. This book explores what happens to corporations and governments when the banking community pulls the collective purse strings. It uses comparative case studies that together provide a broader perspective than would each alone.
eBook - PDF- J. McCombie, C. Rodríguez González, J. McCombie, C. Rodríguez González, Kenneth A. Loparo, Carlos Rodríguez González(Authors)
- 2007(Publication Date)
- Palgrave Macmillan(Publisher)
9 The Role of Financial Institutions in the Context of Economic Development Santonu Basu 171 Introduction The financial sector plays an important role in the context of economic development. However, the role that Financial Institutions played in devel- oped countries was very different from the one they play in developing countries. In developed countries Financial Institutions largely emerged within the process of industrialization. The process of industrialization increased the demand for finance, and many entrepreneurs recognized that there was an opportunity to make a profit from the intermediation between savers and investors or between lenders and borrowers, and this led to the growth of varieties of Financial Institutions. Thus there was a mutual feedback between the two, arising from mutual benefit. 1 In developing countries the process of industrialization was not a natural process of transition from a backward state to an advanced industrial state; instead it relied on the respective governments’ deliberate attempts to reach such a state. Thus there is very little scope, if any, to make profit from engaging in financial intermediation. Yet the Financial Institutions had a very important role to play in fostering the process of industrializa- tion via the coordination between savers and investors. Thus the question is whether, in the presence of low profit opportunity, it is possible for the financial sector to grow by itself by taking an active role, or should assistance be required? Furthermore, will the development of the financial sector alone be sufficient or will government intervention in the operation of this sector be required to facilitate economic growth? 2 This is the subject matter of this chapter, and it will be examined with reference to South Korea and India. The remainder of the chapter is divided into three sections. In the first we investigate the state of the economy at the initial stage, looking in particular
eBook - PDF- Jeffrey Yi-Lin Forrest(Author)
- 2014(Publication Date)
- CRC Press(Publisher)
3.5 FINANCIAL MARKETS In this section, we look at the financial markets in more details. As they have evolved over time, the financial markets collectively have become a huge scale and compli-cated market place. It provides a tunnel to promote the circulation of capitals from those people who do not employ them in any way of production to those who do. The fundamental characteristic of the financial markets is that though trading finan-cial instruments the flow of capitals from non-producers to producers is facilitated. This characteristic determines that the basic elements of the financial markets include suppliers and demanders, financial instruments, and financial intermediaries. Figure 3.1 illustrates the processes of how capitals flow from savers to investors, where the suppliers of capitals include individual people and families, industrial and business firms, Financial Institutions, and government entities. However, as suppliers and demanders, these four parties carry different weights. When seeing from the angle of supply of capitals, Financial Institutions, specifically commercial banks, are the largest suppliers. They are not only organizations, to which various forms of deposits Figure 3.1 Capital flows in a financial system. The financial infrastructure 69 are made, but the commercial banks can also create money multiple times through their demand deposits. In particular, the demand deposits strengthen the credit capability of the commercial banks. In the system of fractional reserves, commercial banks give out loans in the form of crediting the demand deposits of the borrowers. As long as these deposits are not completely withdrawn, they become a new source of funds for the banks. They can then give out additional loans against these available funds.
eBook - PDFThe Successes and Failures of Economic Transition
The European Experience
- H. Gabrisch, J. Hölscher(Authors)
- 2006(Publication Date)
- Palgrave Macmillan(Publisher)
The financial sector can principally described as the market place for stocks of wealth with an asymmetric relationship between borrowers and creditors. A crisis that goes with the devaluation of assets would reciprocally lead to a revaluation of debt, the so-called ‘debt deflation’ (Fisher 1933). The rate of interest for this debt service as the flow category generated by the stock of debts will rise and the ‘real’ economy will have to earn this service by surplus production. The way in which the financial sector can contribute to macroeco- nomic stability is in the first place not to undergo a crisis – i.e. to be robust. This ‘soundness’ of banking and finance is best regarded as the institutional infrastructure in which markets function. Such an institu- tional infrastructure will go beyond the legal framework – contracts, bankruptcy and competition law – and includes a regulatory framework of financial markets as pertains in other key industries such as tele- communication, gas, water, and energy. These key industries are regulated by cost structures that can lead to the emergence of monopolies financial services; the financial services should be regulated because ‘macroeco- nomic stability is an intermediate public good whose provision cannot be contracted out to the private sector’ (Buiter et al. 1997, p. 20). Although the theory of public goods has been shattered since Coase showed that even lighthouses could be run efficiently by private firms, a closer look at the anatomy of financial crises will show the need for state activity. Although the reasons for financial crises can be manifold, four main causes can be located within the domestic economy. First of all, an increase in interest rates initiated by the central bank, for whatever good reasons, can lead to credit rationing, in which case some investment projects will not be financed by banks although they would be profitable under the conditions of higher interest rates.
eBook - PDFBasic Finance
An Introduction to Financial Institutions, Investments, and Management
- Herbert Mayo, , , (Authors)
- 2018(Publication Date)
- Cengage Learning EMEA(Publisher)
These include com-mercial banks, thrift institutions (savings and loan associations, mutual savings banks, and credit unions), and life insurance companies. Many savers are probably not aware of the differences among these financial intermediaries. They offer similar services and pay virtually the same rate of interest on deposits. This blurring of the distinctions among the various financial intermediaries is the result of changes in the regulatory environment. Under the Depository Institutions Deregulation and Monetary Control Act of 1980 (more commonly referred to as the Monetary Control Act of 1980), all depository institutions (commercial banks, savings and loan associations, mutual savings banks, and credit unions) became sub-ject to the regulation of the Federal Reserve. The Federal Reserve’s powers extend to the types of accounts these institutions may offer and the amount that the various depository institutions must hold in reserve against their deposits. Copyright 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. CHAPTER 2 The Role of Financial Markets and Financial Intermediaries 19 Although the Federal Reserve has supervisory power over depository institu-tions’ portfolios, the Monetary Control Act of 1980 gave the managements of various Financial Institutions more flexibility to vary their loan portfolios. In addition, each depository institution was granted the right to borrow funds from the Federal Reserve. The net effect of these reforms has been to reduce the differentiation among the various types of financial intermediaries.
eBook - PDF- David S. Kidwell, David W. Blackwell, David A. Whidbee, Richard W. Sias(Authors)
- 2016(Publication Date)
- Wiley(Publisher)
Like all business firms, banks and other financial institu- tions strive for higher profits consistent with safety. The trade‐off between profitability and safety is more acute for Financial Institutions than for most other businesses because Financial Institutions tend to have low capital‐ to‐assets ratios and because most of their liabilities are short term. Banks can fail because of inadequate liquidity and inadequate capital. 2 Discuss how banks and other Financial Institutions manage their liquidity risk. Financial Institutions have two basic tools for maintaining sufficient liquidity: (1) asset management and (2) liability management. Under asset management, Financial Institutions use liquidity stored on the asset side of the balance sheet in the form of primary reserves and marketable securities. Under liability management, Financial Institutions obtain liquidity by increasing liabilities such as fed funds pur- chased or by issuing certificates of deposit. 3 Describe the methods used to manage credit risk. Financial Institutions manage the credit risk associated with individual loans by closely monitoring loan performance, identifying problem loans quickly, and recovering as much as possible in the event of default. Financial Institutions manage the credit risk of loan portfolios by diversifying across geographic regions, loan type, and borrower type. Financial insti- tutions supplement these efforts by using credit derivatives, securitizing loans, and performing loan brokerage. 4 Explain the process used to measure and man- age interest rate and other market risks. Financial Institutions must first identify the nature of their risk exposures. Once identified, the risks must be mea- sured and assessed to estimate the extent to which firm value might be affected by the risk factor. Finally, managers must determine whether the risk is suffi- ciently large to justify expending resources to mini- mize the exposure.
eBook - PDFHow to Find Out About Banking and Investment
The Commonwealth and International Library: Libraries and Technical Information Division
- Norman Burgess, G. Chandler(Authors)
- 2016(Publication Date)
- Pergamon(Publisher)
46 HOW TO FIND OUT ABOUT BANKING AND INVESTMENT Financial Institutions in the United Kingdom A modern view of British Financial Institutions is given in Financial Institutions and Procedures, a symposium, revised edn. (London, Oyez, 1965), written especially for solicitors. There is a succinct treatment of business finance ranging from the Bank of England, through the clearing banks, issuing and accepting houses to local authority borrowing and the finance of pension funds. A Central Office of Information Reference Division pamphlet describes British Financial Insti-tutions under that title and a new edition was produced in 1966. The functions and working of the capital and money markets in the City of London and a discussion of some of the strains to which the institutions have been subjected since the end of the Second World War, together with an exposition of the present system of monetary management of the Bank of England, will be found in N. Macrae, The London Capital Market: its structure, strains and management, 2nd edn. (Lon-don, Staples, 1957). The relationship of the City in respect of overseas countries is examined in W. M. Clarke's The City's Invisible Earnings: how London's financial skill serves the world and brings profit to Britain (London, Institute of Economic Affairs, 1958). A popular (in the best sense of the word) account of the inner workings of the city from banks, financial markets, and demonstrating how calculations affecting money and its invest-ment in different forms may be performed. A basic instruction in compound interest is also given. General Financial Know-ledge including the Elements of Economics by A. J. Whiteside (London, HFL, 1965) is primarily intended for students, but it is also useful as a refresher. Its scope includes general econo-mic theory, private and public institutions, investment, foreign trade, and finance.
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